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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Testing The Lower End...

Stock-Markets / Stock Markets 2011 Apr 12, 2011 - 04:58 AM GMT

By: Jack_Steiman


We test the high end of the range and we test the low end of the range. Back and forth with now another effort by the bears to bring things down to the lower end of the range. The bulls have tried several times to get the job done, but they have been unable to do so. Now the bears will get their chance. It would actually be good if the bears would succeed a little bit here, because it would ramp up some fear short-term and get that bull-bear spread down below 40% for starters. I don't like seeing there spread above 40%. Handles such as we're in now often serve to remove some of the froth in the market as more and more folks hear about the end of the bull market because we've stopped going up for a while. The longer we handle, or break down some, the more you'll get people thinking another bear market is upon us, which is not a bad thing for the bulls. Let's get this number down to 30%, or lower, in the coming weeks, and then I'll feel much better about things.

Oil is also a major headache that can contribute to the market running lower in the days or weeks ahead. Oil is not as powerful as sentiment in terms of it being a negative, but under no circumstances is oil over 100$ a good thing for this market. Although it took roughly a 110$ reading before the market said that's enough. The market didn't crater lower on that number, but the market did start to struggle more once we got to $110.

With today's gap up failure it seemed as if testing the lower end was in the cards since the 2808 gap has simply become too tough short-term. We've spent lots more time near the upper end, so now it's the bears that get their turn. The market did test near 2760 today, but still no break down as that level is joined by the 20-day exponential moving average just two points lower. 2758/2760 is strong for the bulls, thus they must hold there. If that level goes away then a full test of the 50-day exponential moving average is likely the next stop at 2737. Not a bad thing if we go there, or even breach a bit lower. The lower we go the higher the fear the better the news for the bulls as sentiment unwinds. Fear rules over greed with ease.

The Nasdaq has been leading lower, which is a clear sign that froth is the key here for this selling juncture. The market wants to take down the highest froth, highest P/E stocks. Some of these stocks have really gotten out of hand lately on the upside, and now they're paying the price. If you bought these at the top you're really feeling the pain as many have gone down double digits, some deeply so. When markets are going this boring, but a necessary phase, it's best to keep away from froth and super high beta plays.

Stocks such as Apple Inc. (AAPL) and Netflix, Inc. (NFLX) can't bid. It's a real change of character, but a necessary one for the bears as they attack the stocks that haven't fallen. When these stocks fall it also helps ramp fear. So I am liking the fact that the ones no one thinks can go down are doing just that, and sometimes really hard. The Nasdaq always seems to test key support before any other sector chart. If the Nasdaq breaks it'll likely take other sectors with it. Not easily, but over time, the weight of these stocks going lower would be a huge drag on even the safer stocks, although they won't get nearly as hard. Watching the Nasdaq for more insight.

Alcoa, Inc. (AA) had their earnings report tonight. They basically start off the season. After they report you start to see all the big dogs report in. The stock is getting smoked in a big way after hours. They disappointed. The stock is down 4%. They have been perennial disappointments. The market doesn't take its cue from Alcoa, nor should it. It's a $17 stock for good reason. The market thus far is rewarding good news and hurting bad news. That shows you where the market is. Nothing bad, because if things were bad, the good news stocks would not be rewarded. But so far they have been. You get what you report as it should be. I think the earnings season will be a good one. This is key to keeping the market from falling too far in the coming month, or so.

Now, if they're mostly bad, the market is very vulnerable to a huge drop. I don't think that'll be the case. Alcoa has the chance to get things pessimistic just enough overnight to get the market to gap down at the open. If the market can't find a bid after the gap down then we'll likely lose 2760 Nasdaq in short order. Keep in mind that it would be no shock to gap down and find buyers the way we have been gapping up and finding sellers. The earnings season is here and now things get really interesting.

The headache with markets, such as the one we're in now, is that it takes time for these handles to play out. The market got tired. No one will argue with that. After it got tired it started to have new problems arise. Oil went out of control. Sentiment got out of control. With it all we're still not in bad shape overall. Liquidity is keeping the market from getting hit too hard in this process currently under way. With oil's bad day today off a negative divergence on the daily chart, I think it'll struggle a bit for a short period of time. We got near $114 per barrel, but now I think we can see $105 or so. I would love a break of $100, but I won't get my hopes up too much.

The oil plunge today took down the energy stocks along with the rest of the commodity world. It's sector to sector in this market as we handle out. The more you do in this environment the more you'll suffer. It's just too tough to have full or even half of your trading dollars in this market. Keep exposure very light while this process progresses on. Don't get bored. Sit on your hands as long as necessary. You'll be happy you did when it's time to get more involved.



Jack Steiman is author of ( ). Former columnist for, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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© 2011

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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